Essays on term structure models

PhDEstimating risk premia has been at the forefront of the financial economics’ literature due to their informational content. Risk premia are of particular interest to academics, policymakers and practitioners given the information they disclose on expected asset returns for a given level of risk, their contribution in asset pricing and their ability to disentangle the different sources of risk. However, risk premia are unobserved and their estimates strongly differ from one study to another, as they are highly sensitive to the specification of the underlying model, sparking hence a strong interest in their analysis. The aim of the thesis is to estimate risk premia in a dynamic term structure model setting. The first part of the thesis comprises of an overview of a particular class of dynamic term structure models, namely affine term structure models. The overview will include important concepts and definitions. The second part of the thesis uses a risk-averse formulation of the uncovered interest rate parity to determine exchange rates through interest rate differentials, and ultimately extract currency risk premia. The method proposed consists of developing an affine Arbitrage-Free class of dynamic Nelson-Siegel term structure models (AFNS) with stochastic volatility to obtain the domestic and foreign discount rate variations, which in turn are used to derive a representation of exchange rate depreciations and risk premia. The third part of the thesis studies both the nominal and real UK term structure of interest rates using a Gaussian dynamic term structure model, which imposes the non-negativity of nominal short maturity rates. Estimates of the term premia, inflation risk premia and market-implied inflation expectations are provided.Economic and Social Research Council [Grant reference: EF/I022619/1]. I further acknowledge the School of Economics and Finance at Queen Mary, University of London

Evaluating the Macroeconomic Effects of the ECB's Unconventional Monetary Policies

We quantify the macroeconomic effects of the European Central Bank’s unconventional monetary policies using a DSGE model which includes a set of shadow interest rates. Extracted from the yield curve, these shadow rates provide unconstrained measures of the overall stance of monetary policy. Counterfactual analyses show that, without unconventional measures, the euro area would have suffered (i) a substantial loss of output since the Great Recession and (ii) a period of deflation from mid-2015 to early 2017. Specifically, year-on-year inflation and GDP growth would have been on average about 0.61% and 1.09% below their actual levels over the period 2014Q1-2017Q2, respectively

Disastrous Defaults

We define a disastrous default as the default of a systemic entity, which has a negative effect on the economy and is contagious. Bringing macroeconomic structure to a no-arbitrage asset pricing framework, we exploit prices of disaster-exposed assets (credit and equity derivatives) to extract information on the expected (i) influence of a disastrous default on consumption and (ii) probability of a financial meltdown. Using European data, we find that the returns of disaster-exposed assets are consistent with a systemic default being followed by a 2% decrease in consumption. The recessionary influence of disastrous defaults implies that financial instruments whose payoffs are exposed to such credit events carry substantial risk premiums. We also produce systemic risk indicators based on the probability of observing a certain number of systemic defaults or a sharp drop of consumption